Ed. note: Litigation finance is transforming the fields of both law and finance. To help our readers gain a better understanding of what litigation finance entails, we’ve partnered with Lake Whillans to present an ongoing series so you can better understand how litigation funding works, its pros and cons, and its past, present, and future
In light of the rapidly shifting economy, many law firms and their clients are facing greater challenges in financing meritorious litigation. Litigants are taking stock of their cases and the path forward, mindful of increased pressure to reduce and conserve budgets. Law firms are assessing potentially heightened collection risks. In this uncertain environment, litigation funders like Lake Whillans stand ready to serve as a resource to both claimholders and law firms.
If you lead a corporation that holds monetizable litigation claims, the potential advantages of litigation finance as a risk-reduction mechanism merit careful attention. Similarly, if you lead a law firm that is bringing claims on a contingent fee basis, you may wish to explore the benefits of receiving upfront, non-recourse funding collateralized by a portfolio of the firm’s contingent fee cases.
As claimholders review their portfolios of pending and potential litigation, they should be aware that litigation funding is an option not just at the outset of a case, but at any stage prior to collecting on a judgment or arbitral award. This article will consider the pros and cons of three potential entry points for litigation funding: at the outset of the case, midstream, and post-judgment. Lake Whillans has experience funding cases at every stage.
At the outset
Engaging a funder at the outset of litigation—before the case is filed—has several advantages. Most obviously, the earlier the funder is engaged, the sooner the company or law firm can receive funding and reduce or stop entirely its own spend. Claimholders may be reluctant to initiate litigation or arbitration without a well-developed plan for funding fees and costs, so funding at this stage may be necessary to enable cases to go forward. Litigation finance enables a claimant to conserve more of its capital for use in core business operations, a benefit that is particularly valuable in times of economic uncertainty. Potential claimholders should note that some litigation funding agreements provide working capital to the claimant corporation in addition to covering litigation expenses.
Another benefit to seeking funding at the outset is the opportunity to test the merits and likely damages using the funder’s expertise. The diligence process that experienced funders like Lake Whillans conduct before making an investment decision can be an invaluable opportunity to receive feedback from a sophisticated, impartial outsider on the strengths and weaknesses of the claimholder’s case. Counsel can adjust the framing of the claims in response to that feedback, strengthening the case before it is presented to the court or arbitral tribunal. This stress test and external validation can also help overcome internal reluctance some company management may have to bringing claims in this uncertain environment.
Pricing for an early stage case may be more expensive than for later stage cases. This is primarily due to two factors: risk and time to return. From a risk perspective, early stage claims are generally viewed as riskier than later stage claims that have been tested in court—for example, by surviving a motion to dismiss and engaging in discovery—and where a defendant’s defenses are generally known. From a time to return perspective, early stage claims are generally viewed as taking longer to return than cases that are closer to final resolution. Of course, each case is unique and specific pricing would turn on the specific circumstances attendant to each claim.
Midstream
In some cases, an opportune time to seek funding is midstream, often after the case has survived initial procedural hurdles and fact discovery is well underway or complete, but before a trial begins. Litigation fees and expenses may be climbing steadily amidst discovery, depositions and the need to retain experts — an unwelcome fact to businesses already struggling to cope with the current environment. In some instances, claimants that initially planned to fund a case to completion find an unexpected mismatch between the actual litigation costs and its initial budget, which may have been underestimated or necessarily reduced in the current economic climate. Litigation fatigue may be setting in as hope for an early settlement has faded. Mitigating risk at this stage may simply be prudent for the claimant, while a litigation funder can enable such a claimant (and its counsel) to continue to optimally pursue the case. The good news: at this stage, the funder’s capital may be cheaper because the claims have demonstrated greater viability than at the outset of the case, especially if discovery and court rulings have been favorable to the party seeking funding.
Post-judgment/award
A claimant may also decide to seek funding after securing a favorable judgment or arbitral award but before collecting the proceeds. Such funding can be used not only to finance further proceedings, but to monetize a claim, thereby hedging the risk of loss and bringing significant dollars onto the balance sheet today. Bringing in a funder at this stage can be especially prudent if there are appellate, enforcement or collection risks. Common instances of litigation finance at this stage include (i) monetizing a case that has had a favorable trial outcome but for which a (perhaps lengthy) appeals process is yet to play out; (ii) funding for enforcement and collection efforts that may require proceedings in multiple jurisdictions of uncertain length and cost; and (iii) monetizing a company’s share of a proposed settlement in a large class action, where the anticipated payout may be subject to appellate and time risk. In all of these scenarios, the corporation may prefer to monetize all or some of the judgment/award immediately, especially if its liquidity needs have changed.
Generally, funding at this stage of the case can yield the most favorable pricing for the claimholder. The main downside of waiting until this late stage to engage a funder is that the claimant likely had to invest significant capital to fund the pre-judgment phase of the case and is at risk for not recouping its capital if an unfavorable outcome ensues, and may have already suffered opportunity costs by not allocating that capital to core business activities.
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Whatever the stage of the case, claimholders should bear in mind that litigation funders are available to assist at any stage of their case. An experienced provider of litigation finance like Lake Whillans will be happy to discuss the optimal timing of a potential investment, considering the nature of the claim, the expected timetable of the litigation, and the claimant’s risk tolerance. The best way to determine the timing that is most appropriate to your situation is to contact us.
